Entries from February 2011

Justice Thomas Hits Back at Criticism

February 28th, 2011 at 2:11 am 13 Comments

Politico reports:

Supreme Court Justice Clarence Thomas – his impartiality under attack from liberals because of his attendance at a meeting of conservative donors sponsored by the Koch brothers and his wife’s tea party activism – struck a defiant tone in a Saturday night speech in Charlottesville, Va., telling a friendly audience that he and his wife “believe in the same things” and “are focused on defending liberty.”

Delivering the keynote speech at an annual symposium for conservative law students, Thomas spoke in vague, but ominous, terms about the direction of the country and urged his listeners to “redouble your efforts to learn about our country so that you’re in a position to defend it.”

He also lashed out at his critics, without naming them, asserting they “seem bent on undermining” the High Court as an institution. Such criticism, Thomas warned, could erode the ability of American citizens to fend off threats to their way of life.

“You all are going to be, unfortunately, the recipients of the fallout from that – that there’s going to be a day when you need these institutions to be credible and to be fully functioning to protect your liberties,” he said, according to a partial recording of the speech provided to POLITICO by someone who was at the meeting.

“And that’s long after I’m gone, and that could be either a short or a long time, but you’re younger, and it’s still going to be a necessity to protect the liberties that you enjoy now in this country.”

Thomas spoke at the closing banquet for the symposium, which was sponsored by the Federalist Society, a conservative legal group. Several hundred law students, professors, Federalist Society staffers and guests were in the audience for his speech, which was closed to the press.

It was the first time Thomas has spoken out – at least in a semi-public setting – about the mounting controversies that have swirled around him and his wife, Virginia Thomas, who goes by “Ginni” and who was in Charlottesville with her husband.

The justice’s critics have argued that his attendance at, and speech to, a private January 2008 gathering of major conservative donors sponsored by the billionaire industrialist Koch brothers in Palm Springs, Calif. and his wife’s political activism have compromised his position on the court.

Ryan Can Relax: There’s No Inflation in Sight

February 28th, 2011 at 12:22 am 77 Comments

Conservatives have worked themselves into desperate anxiety that inflation is coming, perhaps even hyper-inflation.

Talk radio personalities stir these fears the better to hawk gold coins.

Yet the fears are also shared by conservative intellectual eminences, like Budget committee chairman Paul Ryan. Ryan recently confronted Federal Reserve Chairman Ben Bernanke to demand: “Do you plan to print more money to reduce the deficit?”

You might think these anxieties would be soothed by the complete absence of any actual measured inflation, even after now almost three years of aggressive monetary actions by the Federal Reserve.

But as Christine Romer wrote in Sunday’s New York Times, we are living through a moment in which ideological expectations about what ought to happen have utterly crushed observation about what is happening.

It’s all a little like Albert Einstein’s famous remark when he was asked how he would have reacted had later experiments failed to corroborate his theory of relativity. “Then I would have felt sorry for the good Lord. The theory is correct!”

A recent paper offers new reason to think, however, that the theory is wrong – and that maybe we should believe our lying eyes instead.

The paper is especially interesting because it is the work of a Canadian economist and former Member of Parliament named Herbert Grubel. Grubel’s name is not well known in the United States, but his work is famous amongst the ultra-gold-bugs: Grubel is the inventor of the concept of the Amero currency.

Grubel proposed the Amero back in the 1990s as a solution to a Canadian problem: the extreme weakness of the Canadian dollar, which had tumbled as low as 62 US cents. (The Canadian dollar is currently over par with US currency.)

Grubel then urged Canadians to surrender their monetary sovereignty in order to obtain a stronger currency. Whatever else you say about the Amero, it was the ultimate hard currency project.

Now Grubel is looking at the American currency, and he argues: there is no inflation problem at all.

Grubel – a libertarian anti-government skeptic – begins with the same question Paul Ryan asks: Will the US government be tempted to generate inflation to escape its debts?

His paper points out that the Fed has little incentive even to try.

More than a third of the US debt is held by government agencies. The government owes the money to itself and so has no incentive to default.

And of the 65% of the debt that is held by the public, 90% is made up of relatively short-term obligations or of inflation-protected bonds. Inflation will offer a government borrower little relief.

Markets agree with Grubel, not Ryan. As we have discussed on FrumForum before, the bond markets are expecting a rate of inflation that is lower than the inflation rate during the early 2000s.

So can we please stop obsessing over hypothetical risks counter-indicated by market measures – and please, please start paying more attention to a urgent national crisis that actually exists: the most severe and prolonged unemployment since World War II.

Follow Noah on Twitter: @noahkgreen


How Do the Rich Vote? Follow the Money

February 27th, 2011 at 10:39 am 11 Comments

In response to my recent blogpost arguing that the rich really are more Republican, FrumForum reader Ken writes that the truly wealthy “vote Democrat by a margin of two to one.” Ken cites a Wall Street Journal article from 2008 to support this claim. Unfortunately, the statistics in that article are unsourced. Robert Frank, the author of this article, cites a survey by Prince & Associates. Back when that article came out, I tried to track down the data and the claim and got nowhere. Here’s what I wrote back in 2008:

Do I believe [the claim that voters worth $30 million or more were favoring Barack Obama]? Not really. My problem here is that I don’t know where the survey is coming from. How did Prince & Associates sample people making $30 million or more? Without knowing at least something about the sampling, it’s hard to say anything at all about these claims. For example, a graph accompanying the article linked above gives estimates of about 0.1 million households with over $25 million and 9 million households with over $1 million. This ratio is about 1%; thus, in a simple random sample of 493 people worth over $1 million, you’d expect to see about a whopping 5 people in the survey worth over $30 million. Or maybe there were 6 such people in the sample; that would explain why the percentages of the super-rich cited in the linked article are 16% (1 in 6) and 67% (4 in 6). The survey might have more than 6 super-rich people in it; I don’t know since no details are given. (I searched on the web for the survey but all I could find were links to the Robert Frank article discussed here.) How do you take a sample of super-rich people? Prince & Associates is a Connecticut-based consulting company that describes itself as “the foremost empirical research firm in the realm of private wealth. . . Using purposive sampling methodologies, Prince & Associates, Inc. has created statistically valid single-study and panel samples providing detailed insights into the hard-to-reach and exceptionally private universe of the affluent.” I respect that this sort of sampling is difficult but it’s hard for me to evaluate it when no description is provided of the sample. I’ll email Russ Alan Prince to see if he can enlighten me on this, but really I’d think it would be the responsibility of a Wall Street Journal reporter to ask some questions here. (I guess it’s possible that Frank did ask some questions but for proprietary reasons did not want to describe the sampling methodology, but if so I would’ve appreciated just a sentence or two on it, to give me a little more confidence in the results.)

The substantive reason I’m skeptical about these findings (as well as a similar report by Daniel Gross in 2004) is the following passage from page 144 of our Red State, Blue State book:

Probably the best evidence [about the political views of the richest Americans] comes from studies of political contributions. Political scientist Thomas Ferguson has tracked political donations of top corporate executives and the Forbes 400 richest Americans (or their equivalents, in earlier periods). The data presented in his 1995 book, Golden Rule, indicate that America’s superrich have generally learned Republican, but with some notable exceptions that have changed over time. Certain industries have persistently higher rates of contributions to the Democrats. In the New Deal, these included industries with a strong interest in free trade. Since the Reagan years, finance, and high technology firms have been much friendlier to Democratic presidential candidates than most of the rest of American business. For 2004, Ferguson consolidated the lists of top executives and richest families into a lot of 674 firms and investors. Out of this list, 53% contributed to George W. Bush’s reelection campaign and 16% donated to Kerry, with Bush doing better among the oil and pharmaceutical industries and Kerry getting more from investment banks and hedge funds.

Given that this 53%-16% gap in contributions in 2004, I’m skeptical of the claim that, in 2004, “the haute millionaires, those worth more than $10 million, favored Kerry 59-41.” Which leaves me skeptical of the 2008 survey as well. Perhaps Prince & Associates is oversampling hedge-funders in Connecticut? I emailed Prince back in 2008 but received no response. That’s fine–I’m sure he’s a busy guy with better things to do that answer emails from statistics professors. But the bottom line is the data I’ve seen shows upper income Americans supporting Republicans (with exceptions in some states, some years, and some sectors of the economy). And the claims I’ve seen to the contrary do not seem supported by high-quality data.


Qaddafi’s Son Denies Attacks on Protesters

February 27th, 2011 at 10:24 am 2 Comments

ABC News reports:

In an exclusive interview with “This Week” host Christiane Amanpour, Saif al-Islam Gadhafi, the son of Libyan leader Col. Moammar Gadhafi and one of his chief advisers, insisted Libya was calm, the military has not attacked any civilians and reports of Libyan diplomats abandoning their posts were simply a ‘miscommunication.’

There was a “big, big gap between reality and the media reports,” Gadhafi told Amanpour. “The whole south is calm. The west is calm. The middle is calm. Even part of the east.”

In response to President Barack Obama’s call for Moammar Gadhafi to step down and the UN Security Council’s unanimous vote to impose an arms embargo on Libya and urge nations to freeze Libyan assets, Gadhafi’s son was defiant.

“Listen, nobody is leaving this country. We live here, we die here,” he insisted. “This is our country. The Libyans are our people. And for myself, I believe I am doing the right thing.”

“The President of the U.S. has called on your father to step down. How do you feel about that?” Amanpour asked.

“It’s not an American business, that’s number one,” said Gadhafi, who was dressed casually as he spoke with Amanpour. “Second, do they think this is a solution? Of course not.”

“[Obama] says if a person can only keep control by using force, then legitimacy is gone,” Amanpour pressed. Gadhafi responded, “Right, but what happened? We didn’t use force. Second, we still have people around us.”

Amanpour noted the extensive reports of attacks on Libyan civilians in recent weeks.

“Show me a single attack, show me a single bomb,” he told her. “The Libyan air force destroyed just the ammunition sites. That’s it.”

Amanpour also sat down with Gadhafi other son, Saadi, in Tripoli. A professional soccer player who is less involved with politics than his brtoher, Saadi Gadhafi still had an ominous warning about what would happen if his father were to step down.

“If he were to leave today, there would be war,” he said. “Civil war in Libya.”

He also described the massive protests in his country spreading like a “fever.”

“It’s going to spread everywhere. No one can stop it,” he said. “That is my personal opinion, and the chaos will be everywhere…they think it’s about freedom. I love freedom. You love freedom, but it’s powerful, this earthquake. No one can control it.”

Regarding the UN vote calling for the freezing of Libyan assets, Saif Gadhafi said, “First of all, we don’t have money outside. We are a very modest family and everybody knows that. And we are laughing when they say you have money in Europe or Switzerland or something. C’mon, it’s a joke.”

Click here to read more.

McCain, Lieberman: Arm Libyan Opposition

February 27th, 2011 at 9:50 am 29 Comments

The Hill reports:

Two senators urged the Obama administration to give “tangible” support to the opposition in Libya in terms of recognizing the opposition as the legitimate government, arming the opposition and establishing a no-fly zone over the North African country.

Sens. John McCain (R-Ariz.) and Joe Lieberman (I-Conn.) spoke on CNN’s “State of the Union” Sunday morning from Egypt, as they’ve been on a regional tour over the Presidents Day weeklong recess.

“This is a real moment of choice for the international community,” Lieberman said of the bloody crisis in Libya, where dictator Moammar Gadhafi has had forces fire on protesters and deaths are estimated to have exceeded 1,000. “What we’re hearing here in Egypt is the Arab world is watching. Will the world stand by and let a leader like Moammar Gadhafi slaughter his own people?”

Both senators welcomed the unilateral sanctions implemented by President Obama at the end of the week, but stressed that more needs to be done.

That would include recoznizing the provisional government that has taken control of the eastern part of the country and giving them the weapons to fight the armed mercenaries unleashed on demonstrators by Gadhafi.

“Let mercenaries know any acts they commit, they’re going to find themselves in front of a war crimes trial,” McCain said.

Click here to read more.

And the Oscar Goes To…

February 27th, 2011 at 7:30 am 17 Comments

In the immortal words of The Electric Company (old-school, thank you — not the remake), “HEY YOU GUYYYYS!!!”  As it is of course our mission to encourage “participatory democracy” in all forms, FrumForum wants YOU…  to tell us what movie(s) are getting your votes for this Sunday’s celluloid Super Bowl.   Not only are there no “awareness ribbons” or acceptance speeches at our “alternate awards”, I’ll even take a chance that our end-of-year death roll will be much more respectful and in good taste than theirs.

As befitting Year 3 of the Great Recession, many of this year’s biggest and most acclaimed films had strong and inescapable political content and context — from the overtly political (Fair Game, The King’s Speech, Wall Street: Money Never Sleeps) to science-fiction  metaphors for end-of-life issues and alternate realities (Hereafter, Never Let Me Go, Inception, Black Swan), to culture-war hot buttons, class warfare, and heroic biopics (The Kids Are All Right, The Fighter, 127 Hours).

As FF’s pop-culture-warrior, here are my picks for the winners and would-be’s for Oscar night.  But in the spirit of one of the nominated faves, The Social Network, it’s time for you to award your “likes” and “dislikes” too.  And in the equal-opportunity spirit of the late Alice Roosevelt Longworth (who was known to say, “If you can’t say anything nice about someone, then come sit by me!”), feel free to note your biggest 2010 movie disappointments, or give the esteemed Academy a thumbs-down for snubbing any of your personal faves. Above all, as in every election, may the Best Man, Woman, or Movie win!


BEST PICTURE

What WILL Win:    The King’s Speech

What SHOULD Win:    The Social Network

It’s more than appropriate that the two hottest contenders for top prize are down to two films about the struggle to control the future.  One, a drama set during mid-century England’s darkest hour as it battled the Nazis from the depths of a royal abdication scandal and the Depression.  The other, an up-to-the-second drama about the Information Generation turning how we communicate with one another upside-down, and obsoleting old-fashioned cultural ”gatekeeping” from publishing to the election of President Obama.

As to the decision-maker, three words:  Screen.  Actors.  Guild.   Whenever there’s a choice between two high-quality films that are down to the wire (The Hurt Locker vs. Up in the Air, Crash vs. Brokeback Mountain, and this year’s horserace between Speech and The Social Network), almost always the choice boils down to which one has the Actors’ Academy’s support – which The King’s Speech does, royally.  And from Shakespeare, Dickens, and Agatha Christie to Upstairs Downstairs and Shakespeare in Love, even the most anti-elite American’s DNA has been trained from the start to give proper English-style productions the leading edge when it comes to high culture.

But to me, The Social Network, despite its faults, is more than just a great film; it is one of THE definitive cultural X-rays of today’s society.  I’ll concede that the battle for civilization against the Nazis is well-nigh impossible to beat in terms of importance. Still, anyone who thinks that The Social Network is nothing more than a bunch of navel-gazing about spoiled teeny-boppers with too much time on their hands, needs to take a good look at the current events in the Middle East to see the political, even world-changing implications of… well… the Social Network.


BEST DIRECTOR

Who WILL Win:    Tom Hooper, The King’s Speech

Who SHOULD Win:    Darren Aronofsky, Black Swan

The odds of a Best Picture winner being divorced from its director is less likely in an Oscar context than a Sarah Palin or even Ralph Nader presidential victory, unless it’s for affirmative-action or a Solomonic split (a la Ang Lee in 2005).  But while Black Swan isn’t the BEST picture of the year, it’s directorial technique and almost Hitchcockian  manipulations of our emotions and expectations are a cinematic opera set to the automatic artistry of backstage ballet.


BEST ACTOR

Who WILL Win:    Colin Firth, The King’s Speech

Who SHOULD Win:    Colin Firth, The King’s Speech

Colin Firth is pitch-perfect in this classicist metaphor for heroism as the reluctant King George VI, thrust against his will into history’s spotlight on the eve of World War II (he also later presided over the hottest of the Cold War and postwar rationing until his premature death in 1952).  Firth’s amazing performance in last year’s long-overdue adaptation of Christopher Isherwood’s uber-controversial, landmark 1962 gay novel, A Single Man, and a versatility that can take him from battling Nazis to boogie-ing down in Mamma Mia! put him ahead of his most deserving competition (James Franco in 127 Hours and Jesse Eisenberg’s fearlessly nebbishy and unlovably lovable turn as a fictionalized Mark Zuckerberg in The Social Network).


BEST ACTRESS

Who WILL Win:    Annette Bening, The Kids are All Right

Who SHOULD Win:   Natalie Portman, Black Swan

Over the years, Annette Bening has given us a museum of memorable meltdowns, from her small-screen showstopper as Jean Harris in a top-notch HBO movie, to her no-holds-barred portrayals of REALLY desperate housewives in American Beauty and Running With Scissors. And anyone who’s seen her on stage or in early performances like Valmont, The Grifters, and Dick Tracy knows her light touch recipe of humor with gravitas. More than one headline has proclaimed, “Just Give Her The Oscar, Already!”   While I second that emotion on principle (ditto Julianne Moore, shamefully passed over for Magnolia, Far From Heaven, and The Hours), the fact remains that no actress of the Top Five this year had as physically punishing or orchestra-playingly emotional a performance as Natalie Portman’s unbalanced ballerina in Black Swan.


BEST SUPPORTING ACTRESS

Who WILL Win:    Melissa Leo, The Fighter

Who SHOULD Win:    Melissa Leo, The Fighter

For those who think that Hollywood has no room for actresses who are 40-plus and look somewhat more realistic than Jennifer, Angelina, and Charlize, they need only look at Melissa Leo.  Attractive though she is, she has played against glamour time and time again, from her breakout role as an overworked detective on TV’s Homicide: Life on the Streets to her stage work and her previous nomination for Frozen River. And as the tough-as-nails, Irish Catholic matriarch of The Fighter’s family, she scores a KO.  Forget Michelle Bachmann and Sharron Angle — Leo is the “mama grizzly” to beat.


BEST SUPPORTING ACTOR

Who WILL Win:    Christian Bale, The Fighter

Who SHOULD WIN:    Geoffrey Rush, The King’s Speech

Perhaps no living screen or stage actor, aside from Daniel Day-Lewis or classic DeNiro and Pacino, has the versatility and Method-commitment to his roles as Christian Bale, who should finally capture the top prize this year.  But Geoffrey Rush defines both British understatement and the essence of true friendship across an almost unfathomable backdrop of class and historical importance as royal speech therapist Lionel Logue.


BEST ORIGINAL SCREENPLAY

Who WILL Win:    Lisa Cholodenko and Stuart Blumberg, The Kids are All Right

Who SHOULD Win:    David Seidler, The King’s Speech

Chalk it up to affirmative-action.  The long-overdue mainstreaming of the lesbian subject matter and Kids’ up-to-the-minute redefinition of “family values” will probably prove irresistible to Hollywood in the Palin/Gingrich era.  (For the record, I’m in accord with the movie’s message of equal treatment.)  Nonetheless, the punishing research and understated, overpowering subtleties of The King’s Speech make its “speechwriter” the on-message choice for me.


BEST ADAPTED SCREENPLAY

Who WILL Win:    Aaron Sorkin, The Social Network

Who SHOULD Win:    Aaron Sorkin, The Social Network

Sorry, “auteurist” film fans. The Social Network is first, last, and in all other regards owned by whip-smart wordsmith (and self-professed “elitist”) Aaron Sorkin. Thanks to his  Broadway and film work (“You can’t handle the truth!”) and his seven-year TV signature, The West Wing, Sorkin is one of the few living screenwriters known more for writing than directing  (Charlie Kaufman being about the only other one) who qualify for the Paddy Chayefsky award of being the definitive voice of their films.


Irish Gov’t Ousted In Landslide Election

February 27th, 2011 at 4:47 am 4 Comments

The New York Times reports:

LONDON — Ireland ousted its discredited government on Saturday, electing new leaders who pledged to restore faith in the country after the trauma of a calamitous economic collapse.

With most of the votes counted after the general election on Friday, a coalition government of the center-right Fine Gael and the Labour Party was on track to win a comfortable majority in Parliament.

The next prime minister is likely to be Enda Kenny, a career Fine Gael politician who is expected to calm the turmoil of the past few years.

“I intend to send out a clear message around the world that this country has given my party a massive endorsement to provide stable and strong government with a clear agenda,” Mr. Kenny said after winning his parliamentary seat.

Fianna Fail, which has run the government for 14 years, suffered its worst showing in its more than 80-year history. It won 78 seats in 2007; this time, it was on course to win as few as 25 out of a total of 166. Of the 47 parliamentary seats in Dublin, only the seat held by Brian Lenihan, who served as finance minister, was set to go to Fianna Fail.

The results by late Saturday showed that Fine Gael was expected to win 76 seats and Labour 36. The Green Party was expected to lose all six of the seats it now holds, and Sinn Fein was on course to take 12 seats — one of them to be held by Gerry Adams, the party’s president, who resigned from his posts in the British Parliament and in the Belfast Assembly in Northern Ireland to run in the Irish Republic.

Click here to read more.

Amid Hardship, North Korean Leaders Hold On

February 27th, 2011 at 4:42 am Comments Off

The New York Times reports:

SEOUL, South Korea — As military and political tensions persist on the Korean Peninsula, North Korea is trudging through another winter of shortages, bitter cold, not much food and precious little fuel.

A recent report from the North described the longest stretch of subzero temperatures since 1945. A number of countries and international aid groups have reported desperate appeals from the government in Pyongyang for humanitarian food aid in the past few weeks. And an epidemic of foot and mouth disease has infected more than 10,000 cows, pigs and draft animals.

But even in the face of such hardships, analysts said, the Communist government showed no sign of relaxing its political grip or opening up its economy beyond agreeing to some joint ventures with China and allowing some private traders to operate.

“Reforms mean death,” said Andrei Lankov, a North Korea expert and professor at Kookmin University in Seoul. “It’s a matter of survival and control.”

Recent refugees, scholars of North Korea and South Korean government officials see no signs that the economic hardships are pointing toward political instability. They see no existential threat to Kim Jong-il and his government, whether through civil unrest, political factionalism or a military revolt.

A change in government, as tantalizing as it might be to Seoul and Washington, seems remote. Mr. Kim, who turned 69 this month, looks to be in passably good health. And the apprenticeship of his youngest son, Kim Jong-un, appears to be under way, albeit slowly and quietly.

North Koreans certainly struggle to eke out a living, but they are not starving. And the situation is nothing at all like the so-called Arduous March famine of the mid-1990s. More than a million North Koreans reportedly died from starvation then when aid from Russia stopped, crops failed and the socialist system of food allotments fell apart.

“The gap between the elite and the rest of the country has probably never been wider,” said John Everard, a former British ambassador to North Korea who is now a fellow at the Shorenstein Asia-Pacific Research Center at Stanford. But at the same time, he added, “there’s no reason to expect things to change anytime soon.”

Click here to read more.

Government Shutdown Veterans: Don’t Do It

February 27th, 2011 at 4:27 am 4 Comments

Politico reports:

A new proposal would keep the government open through mid-March, but battle-scarred veterans of the 1995 federal shutdown are issuing a warning to House Republicans: Don’t dig in too deep.

Their memories of Speaker Newt Gingrich and his new Republican House majority welcoming a fight with President Bill Clinton and cheering a government shutdown are all too vivid for some. The real and political costs of that episode — furloughed workers, park closures and delayed veterans benefits, not to mention Clinton pummeling Gingrich in the ensuing spin wars — are too painful.

Lawmakers stepped back from the precipice on Friday, with Senate Democrats appearing to embrace a two-week measure by House Republicans that would fund the government until March 18 while targeting less controversial cuts backed by President Barack Obama.

But Speaker John Boehner (R-Ohio) is still insisting that Democrats dig deeper for the second half of the fiscal year. He’s demanding they support a House-passed bill with $61 billion in cuts that Democrats dismiss as draconian. And those who had a front-row seat to the 1995 debacle are growing anxious.

“The House has every right to take the positions they took, but it cannot be their way or the highway,” said G. William Hoagland, staff director of the Senate Budget Committee from 1982 to 2002 who became the top budget adviser to then-Senate Majority Leader Bill Frist (R-Tenn.). “In some ways, that’s where it’s similar to the position Speaker Gingrich took in the winter of 1995 where it had to be his way or no way.

“That was a failure of government and certainly a black mark on our elected leadership.” 
While the political lessons of 1995 can be applied today, the situation is much different this time around.

Click here to read more.


Fannie & Freddie Reforms Won’t Save Taxpayers

February 27th, 2011 at 2:59 am 21 Comments

Freddie Mac, the mortgage-finance company operating under federal conservatorship, reported a loss this week of $14 billion for 2010.  No goodwill write-downs or other one-time non-cash charges; Freddie does it the old fashioned way of buying high and selling low.  That a company racking up $14 billion of actual losses in a single year is no longer news should be shocking, but it isn’t when you consider the rest of the story.

Democratic and Republican policy makers are working on plans to wind down Freddie Mac and Fannie Mae and rebuild the US housing system but neither has offered anything new or realistically achievable thus far.  The Republicans, led by Scott Garrett, have pushed for the complete removal of the GSEs from the housing sector and secondary mortgage markets, although this position has softened considerably since the November elections and has become less concrete.  The Democrats have done nothing on GSE reform since the 2008 financial crisis until publishing the Administration’s white paper in February which, while pointing toward a path that limits subsidized lending and GSE guarantees, is even more ambiguous and imprecise than the Republican ideas.  This lack of bold political leadership is reflected in the current budget debates – each side nibbling around the edges (federal payrolls and NPR) but waiting for the other side to dive into the deep end of an empty pool (entitlements and defense). Complicating achieving anything substantive is the fact that the House and Senate are controlled by different parties and there are deep divides within each party. For all the political fanfare generated by the two proposals, the only thing clear is that we are guaranteed a third.

Noticeably lacking from each reform proposal is any substantive discussion of the consequences of removing or reducing the GSE’s future role in mortgage lending and, perhaps more consequentially, the impact of shrinking the GSE’s existing loan portfolios.  If either approach were to be implemented:

1) The Big Four banks are not eager to absorb all of the risk left behind by Freddie and Fannie (unless they become the beneficiary of the government guarantees, something which is gaining favor in certain circles, no doubt advanced by their considerable lobbying resources) and any GSE pull back in new lending would far exceed private capital available to fill the void.  As a result, interest rates would spike and consumer home buying credit would plummet; and,

2) The GSE’s disposition or sales of existing loan portfolios would crush asset prices in the market, potentially triggering another financial crisis down the road.  There is perhaps $30-40 billion in private capital currently available to buy delinquent mortgages.  At the end of 2010, Freddie Mac and Fannie Mae, under the most blissful circumstances, held approximately $200 billion in delinquent loans on their own books.  These figures do not exactly create an equilibrium supply-demand curve.

What becomes of the US housing “recovery” if the GSE’s fade away? I use quotes because the US housing sector is nowhere close to recovery mode as most markets, regardless of GSE reform, will experience an addition 10%+ slide in prices in 2011.  And in 2012 that slide may accelerate.  Reduce GSE conforming loan limits, reduce the government wrap on GSE bonds and “poof” there goes the US housing recovery, and along with it any overall economic momentum.  I use quotes because it wouldn’t happen quickly, it would drag on for years and years. Negative home equity will contribute to vast inventories of foreclosed homes and distressed sales, producing even larger bank losses and consumer pain, which will inevitably lead back to continuing government intervention, borrowing and interest rate manipulation.  Does this sound like Japan in the 1990s anyone?  Pretend and extend (and, if we are really like Japan, eventually default).

Congress and the Obama Administration have had an unprecedented set of challenges before them and GSE reform may prove to be more difficult than health care reform and Dodd-Frank combined.  Ignoring the 2012 political calendar for the moment, how do you actually pass legislation that can reconcile reforming the GSE’s with reducing government borrowing, reducing deficits while promoting economic growth?  There are contradictions at every step.  Taxpayer aid to Fannie Mae and Freddie Mac is already more than $150 billion ($54 billion to Freddie) and could total $224 billion by the end of 2012.  The numbers are staggering and will increase dramatically if no GSE reforms are implemented… and may increase exponentially if they are.

But what is really shocking, or should I say silly?  That the 20% of Freddie Mac that Treasury does not own is still publicly traded (NYSE:FMCC)!  Freddie Mac has a negative net worth of $401 million.  Who is buying this stock?  One would think a company would have to be worth something in order for its stock to trade above $0 but in this era of make believe economies, budgets and balance sheets, anything is possible.  Except getting rid of the GSE’s anytime soon.

Steven Trowern is a partner at MCM Capital Partners, LLC, a residential mortgage investor and advisorFormerly he was CEO of Dynamic Capital Mortgage, Inc., a residential mortgage lender.